As North Korea knocks Wall St. stocks, some look for reasons to buy

Noel Randewich

5 Min Read

SAN FRANCISCO (Reuters) - Tension between North Korea and the United States over a weekend nuclear weapons test, and the possibility of another missile test, knocked stock prices around the world on Tuesday, yet some investors saw any selloff as a reason to buy in a bull run which is now more than eight years old.

FILE PHOTO - Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., August 31, 2017. REUTERS/Brendan McDermid

North Korea on Sunday said it exploded an advanced hydrogen bomb capable of being carried on a long-range missile.

After U.S. markets were closed on Monday for a holiday, the benchmark S&P 500 stock index fell 0.75 percent on Tuesday.

Still, any sell-offs in U.S. stocks this year have been brief as investors stepped in to buy-the-dip. The S&P500 has only fallen 1.0 percent or more four times this year, compared with 22 times in 2016. AS a result, analysts are divided on whether a prolonged sell-off is overdue, and how hard stocks could fall.

“The market seems to be getting tired,” said Scott Minerd, global chief investment officer at Guggenheim Investments, which has $237 billion in assets under management. “For stocks, if there is a serious correction, we are looking to buy the market.”

Terri Spath, chief investment officer at Santa Monica, California-based Sierra Investment Management, said that the rising tensions in North Korea are prompting what she called normal volatility in the stock market, but that so far there are no indications that they are having an effect on the expansion of the US economy.

“When you have a day like today, we are focusing more on the opportunities,” she said.

Underscoring investor optimism, about 326 stocks on Wall Street hit new highs on Tuesday, compared to just 71 stocks hitting new lows, according to Thomson Reuters data.

U.S. stocks have been in a more than eight-year bull market, boosted by the election of Donald Trump as U.S. president, with his promises of tax cuts and increased infrastructure spending. While those promises are yet to materialize, stocks have been held high by bumper corporate earnings.

“The overarching environment is still constructive for stocks,” said Michael Arone, chief investment strategist at State Street Global Advisors in Boston. Arone said positives were “good but not great growth”, a relatively low chance that the Federal Reserve will raise interest rates again this year and the fall in the U.S. dollar which has boosted multinational earnings.

Stock price gains have come despite worries along the way about rising valuations based on earnings, the U.S. government’s deteriorating relationship with Russia, the economic fallout from Brexit in the U.K. and Hurricane Harvey battering Houston.

Sunday’s nuclear bomb test followed North Korea firing a ballistic missile last month over Japan, as well as threats to attack Guam, a U.S. territory.

But so far, increased saber-ratting between Washington and Pyongyang has had little effect on stock prices.

The S&P 500 remains down 0.9 percent from a record high close on Aug 7, before Trump warned North Korea not to attack Guam, a U.S. territory in the Pacific Ocean. The day after North Korea fired a ballistic missile over Japan on August 28, the S&P 500 eked out a gain 0.08 percent.

The S&P 500 remains up 10 percent in 2017 and valuations remain rich. The S&P 500 is trading at 17.5 times expected earnings, far above its 10-year average of 14.2, according to Thomson Reuters Datastream.

Even though stocks have been resilient, the “buy-the-dip” mentality may have its limitations.

Stock investors see hurdles to more strong gains. They are increasingly worried about Trump’s ability to push promised tax reform through Congress, as well as a deadline for Congress to raise the nation’s debt ceiling by the end of the month to avoid a default. Third quarter earnings are also expected to show less growth than in the first half of the year.

Despite the relative calm, investors agree that a correction remains a real risk.

“Everyone has been looking for the catalyst, maybe this is the catalyst,” said JJ Kinahan, chief market strategist at TD Ameritrade in Chicago.